Teasers, tiers and conditions: reading the fine print behind a top savings rate

Which of these are you?

• You are comparing a few accounts and one advertises a much higher rate: run the blended-rate math below before the break-even math. A headline rate is the best case for a balance you may not have.
• The rate needs a monthly deposit, a card swipe or a subscription: go to the conditions section. The question is what a single missed month costs you.
• The rate is labeled introductory, new-money or limited-time: go to the promotional example. The question is how many months of the gap you will really collect.
• You already decided to move and want the order of operations: skip to the checklist table, then read Chapter 6 on moving without breaking payments.

Why is the advertised rate often not the rate you earn?

The advertised rate is the rate for the best-case dollar under the best-case behavior for the best-case period. Your rate is the average over your actual balance, your actual month-by-month behavior and the full time you hold the money there.

An account can narrow the headline three ways: a balance rule (only some dollars earn it), an activity rule (you must do something to earn it) and a time rule (it ends). Banks may use all three, and Regulation DD governs how they are disclosed. None of them changes the first number a rate table shows you, which is why a ranked list of rates cannot tell you what you will earn. Our own Rate Half-Life study tracked rates that were scraped from institution pages, and a scraped number is the headline, not your blend; the study measures how long a rate holds a top-10 spot, which is a different question from what a given saver is paid.

The rest of this chapter turns each rule into a number. The method is the same each time: replace the headline APY with the APY that applies to your balance and your behavior, then feed that into the break-even math from Chapter 1.

What must a bank tell you about a savings rate?

Under Regulation DD (12 CFR Part 1030), a bank must disclose the APY and the interest rate, how often interest compounds and is credited, any minimum balance needed to open, avoid fees or earn the disclosed yield, how the balance is determined, and any fee and the conditions for it (12 CFR 1030.4(b)).

For a fixed-rate account the disclosure must state how long the rate stays in effect. For a variable-rate account it must say that the rate and APY may change, how the rate is determined, how often it may change, and any limit on how much it may change (12 CFR 1030.4(b)(1)(ii)). Advertising has its own rules: an ad that states a rate must call it an "annual percentage yield," and an ad that states an APY must state the minimum balance required to obtain it, the minimum opening deposit if that is larger, and that fees could reduce earnings (12 CFR 1030.8(b) and (c)). For a tiered-rate account, Appendix A to Part 1030 (Part I.D) requires an APY, or a range of APYs, for each balance tier, and an ad that states one must show each tier's minimum balance in close proximity and with equal prominence (12 CFR 1030.8(c)).

Two consequences for a reader. First, every number in the checklist below has a legally required home in the account disclosure, so a missing answer is a reason to ask the bank, not a reason to guess. Second, the rules do not cap how low a tier or a post-promotion rate can be. They require that you can find it.

On changes: a bank must give 30 calendar days of advance notice of a change in a disclosed term that may reduce your APY or adversely affect you, but changes in the rate and APY of a variable-rate account are excepted from that notice (12 CFR 1030.5(a)). A variable rate can therefore fall without a 30-day warning. This is why a reminder you set yourself beats waiting for a letter. See Chapter 3 on how long a top rate lasts.

How do balance tiers change your real rate?

A tiered account pays different rates on different slices of the balance. Your real rate is the interest across all slices divided by the whole balance, and it falls as the balance grows past the high-rate tier.

Take a hypothetical account that pays 4.20% on the first $10,000 and 0.50% on every dollar above that. These are round numbers, not a quote. For a balance B, annual interest is 0.042 x min(B, 10,000) + 0.005 x max(B - 10,000, 0), and the blended rate is that interest divided by B. Interest here is the annual APY applied to each slice, ignoring compounding detail, so it is a comparison figure, not a statement forecast.

Check the $25,000 row by hand: 10,000 x 0.042 = 420, 15,000 x 0.005 = 75, and 495 / 25,000 = 1.98%. The headline fits a balance up to $10,000 and misleads for anything larger.

Now compare it with a hypothetical flat account at 3.60% on every dollar. The two earn the same where 420 + 0.005 x (B - 10,000) = 0.036 x B, which solves to B = 370 / 0.031, about $11,935. Below that the tiered account earns more, above it the flat account does. On $25,000 the flat account earns $900 against $495, a difference of $405 a year, even though its headline rate is lower. A tier threshold is therefore a number you compare to your balance, not a detail to skim.

Two other tier structures exist and the disclosure should say which applies. In a layered structure, as above, each rate applies only to its own slice. In a whole-balance structure the rate for the tier your balance falls in applies to every dollar, so one more dollar can raise or lower the rate on the whole account. Appendix A (Part I.D) requires the APY to be disclosed for each balance tier, and the institution's own interest-calculation method determines how the tiers are computed, so the account agreement, not the ad, tells you which one you have.

Worked example: the headline gap versus the blended gap

Against a 1.50% account, a 4.20% headline suggests a 2.70 point gap, but on $25,000 under the tier above the blended gap is 0.48 points. That moves the net gain over 12 months from $607.87 to $68.12.

The first calculation overstates the gain by $539.75 over 12 months, the difference between $607.87 and $68.12. The move still pays in the second case, but the break-even month moves from month 1 to month 6, and a bank that also charged a fee or paid only for a few months would flip the answer. Enter your own balance and the blended rate, not the headline, below. Taxes are ignored on both sides because interest is taxable income either way.

The older rule of thumb, "switch when the gap is large enough," fails here because the gap is not the headline gap. Compute the blend first. If you want the 12-month minimum gap that repays a given cost, the formula is cost x 12 / (balance x months): a $50 cost on $25,000 needs a gap of at least 0.20 points to repay within 12 months.

How do monthly conditions change your real rate?

An activity condition pays the high rate only in months you meet it, so your real rate is a weighted average of the high rate and the fallback rate, weighted by how many months you qualify.

Take a hypothetical $15,000 balance in an account that pays 4.00% in a month you meet its condition and 1.00% in a month you miss it. Meeting it all year earns about $15,000 x 4.00% = $600. Meeting it in 9 of 12 months gives a blended rate of (9 x 4.00 + 3 x 1.00) / 12 = 3.25%, so about $15,000 x 3.25% = $487.50. You lose $112.50 for three misses, which is $37.50 per missed month, or 15,000 x (4.00% - 1.00%) / 12.

Conditions come in four common shapes, and the questions differ.

• Deposit or direct-deposit minimum: what counts (a payroll deposit only, or any transfer), what amount, and whether the deadline is the calendar month or the statement cycle.
• Spend or card activity: how many transactions and which ones qualify. Pending transactions and returns may not count.
• Growing-balance rule: whether the balance must rise every month and what happens in a month it cannot, for example after a large bill.
• Paid tier: a subscription or package fee that unlocks the top rate. Compare the extra interest in dollars with the fee in dollars. A hypothetical 0.50 point boost on a $10,000 cap is $50 a year, while a $10 monthly fee costs $120 a year, so the boost alone loses $70.

Also ask what the fallback rate is. A condition with a fallback close to the headline is a small risk. A fallback of 1.00% against 4.00% is a large one, and the largest risk is the one you cannot see: the account that quietly drops you to the fallback rate after one missed month and does not say so until the statement.

What does a promotional or teaser rate really pay?

A promotional rate pays the gap only until it ends, so its value is the number of promotional months times the monthly gain, not twelve months of it. Whatever the account becomes after the promotion decides whether staying makes sense.

For a fixed-rate account the disclosure must state how long the rate will be in effect (12 CFR 1030.4(b)(1)). For a stepped-rate account, Appendix A (Part I.B) tells the institution to assume each rate is in effect for the length of time the deposit contract provides. Both are cues to find the date, not trust the word "introductory."

Use this hypothetical: $20,000, your current account at 2.00%, a new account at 4.50% for 3 months that then steps to a 3.00% ongoing rate, and a switching cost of $50 (2 hours at $25 an hour).

The arithmetic: months 1 to 3 gain $40.46 a month over staying, which is $121.39. Months 4 to 12 gain $16.29 a month, which is $146.64. The sum less the $50 cost is $218.04 over 12 months, with break-even in month 2. If the 4.50% had held all year the net gain would have been $435.57, so the step-down removes $217.53 of the gain.

The example still pays because the post-promotion rate is above what you earn now. The more common trap is a post-promotion rate at or below your current rate, in which case the entire gain is the promotional months, and the break-even math can fail on a short promotion with a long switching process. Put the post-promotion rate and your total cost into the calculator before you move, not the headline.

What about minimums, caps and withdrawal limits?

These are the terms outside the rate that can change what the account is worth to you: the minimum to open or earn the rate, a cap on the balance that earns it, and a limit on how many times you may move money out.

A minimum balance or opening deposit can sit above what you meant to move; both are disclosed (12 CFR 1030.4(b)(3) and 1030.8(c)). A cap is the tier problem in another form: the rate may apply only up to a dollar limit, so the rest of your balance earns something else. Fees matter because they reduce earnings, and the disclosure must state any fee and the conditions for it (12 CFR 1030.4(b)(4)).

On withdrawals, Regulation D long limited savings deposits to six convenient transfers or withdrawals a month. On April 24, 2020 the Federal Reserve Board issued an interim final rule that deleted that limit and allows depository institutions to suspend enforcement of it, without requiring them to. I found no later final rule on the Board's pages, and the Board's FAQ says it has no plans to re-impose transfer limits. The Board's FAQ also says Regulation D neither requires nor prohibits fees for transfers over the limit. So whether a given account still enforces a limit, and what it charges, is set by the account agreement. If you plan to move money in and out often, for instance to meet a monthly condition, confirm the limit and the fee before you rely on the account.

The checklist before you move money

Print this table, fill the right column from the account disclosure and the offer page, and keep both pages. If a line has no answer, ask the bank before funding.

A cash bonus is its own offer with its own terms, so keep it out of the rate math until you have checked it separately. Add a bonus to the cost side only if you will actually receive it, as in the shared definition of switching cost.

Where does this leave the decision?

Use the headline only to decide which accounts to read. Decide on the blended rate, the months you will collect it and the cost of moving. For today's reference points, the best savings APY we track is 4.27%%, against a national average of 0.38%%. Those are single numbers for the best and the average account, and neither is your blend.

If your balance fits inside the top tier, the conditions are ones you already meet, and the post-promotion rate is acceptable, the headline is close to the truth and the break-even math in Chapter 1 is the last step. If any of those fails, recompute with the blended or fallback rate. If the result is negative or marginal, stay and revisit when the offer changes. See what is a high-yield savings account and the best savings accounts list for the field, and Chapter 4 for why variable rates drift.